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The New Rules of Mortgage Lending

February 13th, 2009 8:38 AM

Reporting in a recent online article, Les Christie of CNNMoney.com reveals the changing nature of mortgage lending. Long gone are the days of sub-prime loans with no proof of income and low credit standards.

Today, buyers looking for a traditional mortgage are now faced with a different set of factors to consider.

Paying Up-Front Points

Many buyers can develop "interest rate envy" by fixating on a specific interest rate and refusing to yield to the prevailing market conditions. When rates continue to go against them and they still can't decide, there is one solution that can break their mental deadlock.

Borrowers can pay points - one-time, up-front fees - to reduce their mortgage's interest rate over the life of the loan. One point represents 1% of the mortgage value.

Traditionally, buyers often assume that they should never pay points, according to Alan Rosenbaum, founder of mortgage broker Guardhill Financial. That could be a mistake.

The old rule of thumb was that paying one point at closing could lower their mortgage's interest rate by a quarter percentage point or so.

But now borrowers can get a lot more bang for their buck. "Today the spread is worth a half point to a full point on the rate," stated Rosenbaum.

When interest rates were high, paying points didn't make sense because borrowers were very likely to refinance after rates dropped. They wouldn't hold their original loans long enough to recoup their up-front costs.

Paying $2,000 more on a $200,000 mortgage at closing can shave as much as a whole percentage point off the loan's interest rate. Reducing a 6% loan to a 5% loan by paying upfront points would save $126 a month and pay for itself in 16 months. Even if the rate were only lowered to 5.5%, that would still save $64 a month, paying for itself in 32 months.

Still, not everyone is convinced. Rosenbaum recently had a client who chose a 15-year fixed rate loan at 5.875% with zero up-front points on a $800,000 loan, instead of paying a point to get a 5.375% loan.

Had the borrower chosen to pay that point, he would have recouped that cost in about three years, and then gone on to save more than $200 a month for the remaining 12 years of the loan.

Buyers who are planning to refinance or sell within a few years shouldn't consider this strategy since it doesn't pay in the short term.

Source Link: New Rules of Lending

Posted by Customer Service on February 13th, 2009 8:38 AMPost a Comment (0)

The New Rules of Mortgage Lending Part 2

February 20th, 2009 6:17 AM

As reported by Les Christie, CNNMoney.com

As mortgage lending rules continue to change, we take another look at part two of reporter Les Christie's CNNMoney.com online article exploring the new options available to borrowers. Part one is online here if you missed it last week.

Making more than the minimum down payment

If you can afford to put 25%, 30% or more as a down payment, should you do it?

Today, we've come full circle to where a standard loan is in reality a conforming loan and the required minimum down payment is 20%. If a buyer could afford to put more than 20% down, it was generally assumed that they should.

The traditional thinking was, "If you have the capital to commit, why not?" said Keith Gumbinger of mortgage research firm HSH Associates. "It will give you a smaller balance to pay off." In light of the declining home markets, not everyone would agree with that strategy.

High down payments can be wiped out in severely declining markets.

Take the example of an Arizona couple who put $400,000 down on a million dollar house. They assumed a larger down payment would provide a nice home equity cushion should they run into financial trouble.

But in a falling home market "prices are down so much, the couple still fell underwater," stated Gibran Nicholas, founder of the CMPS Institute. It would have been better to have conserved the extra down payment cash for an emergency if they might need it.

Locking in the mortgage rate

Many borrowers choose not to lock in when they see falling interest rates. They assume that the deals will only get better. But that's often a mistake.

"We almost always recommend that if you have the numbers that make your deal work, then lock it in," said Gumbinger. Attempting to time the market bottom is a fool's folly. Most professionals cannot predict the bottom and your chances of doing so are not much better.

His reasoning: Interest rates tend to jump up much faster than they inch down, meaning that buyers are much more likely to get stuck with a higher mortgage rate than they are to get a lower one if they opt to wait. Locking at these current historically low interest rates can give you piece of mind during the high stress endeavor of buying a house.

Posted by Customer Service on February 20th, 2009 6:17 AMPost a Comment (0)